Thompson On Cotton: Market Range-Bound — For How Long?

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Range-bound as this market has seemingly been all year, it has at least generated some excitement over the past few weeks. Driven mostly by money funds, both the July and December contracts have traded at the upper end of their 60 to 66 cent price range, although not able to break through resistance at 66.50, despite repeated attempts.

Since July goes off the Board this week, I will limit my comments to the new crop December contract, even though this most recent rally did provide those still holding old crop an excellent pricing opportunity based July.

If you analyze both the technical and fundamental factors long enough you will find there are just as many reasons to support this rally as there are reasons to be bearish. Hence, why we remain range bound. The sustainability of a fund fed rally is always called into question. In search of quick returns for their abundant cash, these fund managers will reverse their positions so quickly one has little time to react.

Since May, they have become quite bullish, steadily adding to their long position. This renewed interest in cotton was influenced by planting delays in West Texas and its possible effect on the size of the US crop. While other positive factors include a decline in the value of the dollar, the lack of action by the Fed to raise interest rates, minimal returns on equities, attractive grain markets, and possible cotton production declines outside the US.

As a result, the December contract traded over 66 cent several times in the past couple of weeks with the most recent being this past Friday June 17th to close the week at 65.92.

However, the winds of change began to stir Tuesday of this week as the December contract suffered triple digit losses of 160 points to close at 64.39. Such is the vagaries of a market influenced more by macro-economic factors rather than cotton fundamentals. This retreat was reminiscent of what we’ve seen over the past several months.

Any breakout attempt is quickly driven back by the news of the day. Bearish influences causing this pull back included a better than expected USDA crop conditions report for both cotton and grains, concerns the dollar will strengthen following the Brexit vote on Thursday, further expected declines in Chinese cotton imports, and reduced demand for cotton as the world economy slows even more.

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Though I remain the eternal optimist, it’s difficult to see the cotton market trading anywhere but within this same range, at least until closer to harvest when the crop size is better known. What is known, however, is the advantage we have in growing high quality cotton and the benefits provided it when pricing. The best thing you can do market wise at the moment is focus on doing everything necessary to produce quality fiber.

Consider forward contracting a portion of your crop if the futures market returns to more favorable levels at the upper end of its range. Choice Cotton has available several different contracts with a positive basis and quality premiums built into them. I caution you, don’t be lulled into thinking the historically high bids for recaps will be there come harvest as they have for the past two seasons. There is no guarantee of this so it would be wise to hedge your bets by using a combination of the two.


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